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Archive for the 'Market Crash' Category

The beauty of the market is in its being free. The stock markets are supposed to be left free and here the flow of information is also supposed to be unhindered and made available to all. There are still some impediments in the free flow of information due to some technical difficulties and some obstructions deliberately put in place by the interested.

What ever the case be the markets should be left without intervention but is there a need to control the markets when prices tend to hugely deviate from the seemingly normal price for the day?

In my opinion the intervention by govt should never be by any such rule. There is ,however, an implied obligation on the part of govt to see that the market does not attack the price levels beyond the reasonable level in a short time. It is necessary from the point of view of not letting any body unduly suffer just because market condition coincides with ones requirement of withdrawing cash. It is also necessary from the angle of not making the risk capital pooling to difficult or too costly. The participants would account for higher risk in the pricing if such times come about in markets or may come. This is a cost best saved by having some mechanism by which the absurd pricing on the up or down side is prevented. If an economy can reduce the risk element in risk capital due to abnormal conditions, it will be a great economic service to the nation at far lower cost than by any other means. I think these should be the only purposes and none else while the govt does something to stabilise the market. I repeat that intervention in free trading by rules will be negative.

How can it be done? In India it is very easy to do. The state owned banks should have some pocket where they have stocks and funds ready for use in terms of their researcher’s advice. The second is that RBI can have sovereign fund allowed to be funded in times of such need by RBI’s large kitty at the shortest notice while its stocks related economic researchers should be updating the applicable action plan on a regular basis.

There is a further need of having a board which may order entry into market when need arises. Top secrecy should be maintained about the intended size of fund deployed for the purpose . It should best be done by wide speed buying rather than in a concentrated fashion.

Another point that would save the markets is that there should be no funding by the banks for share purchase. The risk capital should be from out of only the owned funds and not borrowed funds. On private basis people may do whatever. In fact promoters also should not be funded on the strength of share holding in their own companies, neither the shares should be accepted as security for other advances. This will bring a balance and put a premium on the shares. The present day world crisis is due to faulty home mortgages, what would have happened had there been large scale lending backed by stocks. Since there always is necessary liquidity available one should meet his short term need selling stocks and buying back when the funds are spare.

The leverage obtained in market in ‘F and O’ section is not based on financing by institutions and is mostly private arrangement through the mechanism and hence it is Okay. The lending and borrowing of shares for sale etc should also be restrictedto individuals and direct owners like corporates and not be done by institutions who are not direct owners of shares like MFs and other such entities.

In fact leverage is mostly a tool in the hands of organised cartels in markets who try and take advantage by manipulation. There scheming goes to the extent of either perishing themselves or perishing those on the other side.

The US Fed has reduced rate by 50 bps with assurance that more will be done if required. It was a unanimous decision.The US market has not reacted up as it was already a known thing. However, the Asian stocks have shown good jumps as every passing day the stability is returning. The interest rate cut is the best medicine for ailing stocks, it works at many levels about which I have explained earlier. With rate cut here, our economy can enter in fast lane overnight but the RBI always wants to be seen as an elephant taking turns slowly while if Indian economy has to be tiger like the RBI will behave in a tiger like fashion. I despise Reddy’s raising of CRR and had raised alarm then itself. If he had been slightly imaginative India would have maintained its edge on the world scene. The present chief should at least see the light of the day.

These outpourings may seem scholarly but in fact are just for the purpose of giving back ground idea to the young.

There are variety of fears that people are nursing in their minds. Some of them are given below:

-that the financial system is going to collapse around the world and hence the purchasing power should be converted in to bullion.

-the bank failures will be rampant, at least in case of private banks, hence money be kept only in SBI.

-the shares will be worth only as much as the paper used in certificate.

-there will be hyper-inflation and the only thing that will have value is ‘roti’ or ‘double-roti’. For the rest there will be no buyer, hence store wheat and wood.

-the recession will make companies loose all their reserves because they will be selling end product at lower value than the raw material consumed.

-the bear market will continue for eighteen to twenty four months.

-the banks do not have trust in each other and clearing process will stop.

-the petroleum is cheap hence the recessionary times are round the corner.

-the cheap commodity prices are bad for even the assemblers and value adders.

-there is no buying power with people.

-companies will have lost pricing power.

-there will be job losses on large scale.

-the machinery of companies will not be saleable as scrap even. The land and building will rot and salary payment will be eating the entire companies reserves.

-foreign capital will not enter ever in India and flight of capital will continue.

-dollar will be costly and rupee of no value.

-elections will further deteriorate the situation.

-the global slow-down will make us suffer more.

-the worst is yet to come.

Now, you have to rationalise them yourself and carry only the necessary weight of fear. I have spelt out these fears above because while they lurk they are more forceful, once you give them a cool careful glance you may overcome them.

RBI has not met expectations of markets and India saw one of the worst downfalls and Nifty closed down 359 at 2520 points. There was no further release of money into market by RBI while it was observed by RBI that Indian economy is on track. The other markets did not help either, after weak Asia and weak European advices the US markets have also tumbled down today. While there is no limit to up side down side should have some limit. How in the world would one sell assets worth much more, far cheaper, just because these assets happen to be marketable ie represented by equity shares.

I find govt lacking in its duty today, back in eighties and early nineties, the govt used to direct the institutions to come for support of market, when ever there was undue pressure. Mr Pherwani of UTI used to be called big bull. He had contributed a lot to the development of capital markets. Such directives from govt are missing today.

Govt should direct banks to pick up good quality stocks without hitch. Any enlargement of crisis will make matters worse for all finance sector entities. One reassuring sign is that there is no payment crisis in markets. The banks are doing business as usual and this is a great thing.

I was surprised last year at all asset classes going up simutaneously and deducted that the world would face some crisis. Today reverse is happening while all asset classes are going down. This may be due to the rewinding action and may be this would make world healthy again. Why should all this happen, is some thing that should be found an answer for. I maintain that the supply and contraction of money in hands of central banks is the cause of it.

In India, so far, the credit off take is normal, banks are lending. The crude is further down to 64 dollar/bbl, the inflation number in coming down and only gradually, the infrastructure funding is increasing.

There hasn’t been redemption of mutual funds on an alarming scale. FIIs have sold just Rs 1450 crs worth of equities today and under what design they are selling it so cheap is again a question. While picking stocks they were seen to be doing thorough home work and why while selling no home work is being done.

The cash rich companies should have announced their ‘buy back shares’ plan. They should have done it in hoards, a few have done to. Isn’t it just proper for every good management to postpone the expansion plans and utilise cash for the share buy back. This will reward the shareholder very handsomely. But it is not being done because may be the smart management are happy for the falling markets and would pick stock for themseleves at these prices.

If only the right things were done by right people at the right time,the world would be much more prosperous. Since this does not happen, the reverse is that some in position are out to profit at the cost of general public. It is a relief that India’s 80 pc population is still in traditional style exchanges and not entangled with the new age trading style.

The fall without a matching event taking place is surprising enough. How will the truth come out?. Since the abnormal times were in every body’s knowledge, the excessive trading is not there in any case to warrant such falls.

My regular readers would recall that last year I had expressed surprise at all asset classes and commodities going up simultaneously. Then the world encountered the sub-prime crisis of no ordinary nature. In fact both have the same source responsible for such behaviour. It was excessive liquidity in USA (by liquidity I mean unabsorbed monetary stock with people around the world and denominated in dollar like leading currencies). The busting of positions in commodity market has seen that money getting lost, rest of it saw diminishing in the aftermath of sub-prime crisis. The final acts of drama have been played out in the episodes concerning Freddie and Fannie bail out, the bankruptcy filing by Lehman Bros and take over of Merrill Lynch by BoA. The AIG is now offer succour by US Fed. We in India saw the exit of FIIs not on account of prospects getting worse but because the overseas investors were under pressure of the not yet known financial pressure back home and had to willy-nilly get out of India. So the period of past 12 month is a period of unnatural trading patterns in equities,bonds,commodities,real estate and currencies. That’s why I have been advocating to every one of you to get hold of healthy productive assets represented by the share of a good company at reasonable to lower than reasonable prices.

It is 0730 hrs IST while I am writing this and Hengseng is up 283 points, Nikkei up 241 points, Taiwan up 141 points, DOW up 141 points, Straits up 10 points, Kospi up 45 points and crude is 94 dollars after seeing low of 91 dollars yesterday. Would not see the Indian indices opening gap up by 2 p.c. or so. Your chance is to gradually deploy your cash in market for there would be a day showing up swing of over 6-7 p.c. Along the bullish path and would make further investment difficult. The rupee is weakened to 46.88 and RBI would have to intervene by selling dollars which will mop up liquidity and therefore next policy may announce reduction in CRR and banks would have reason to rejoice.

The melt down of Nifty to a level of 4040 has really been unnerving not for the fall it has suffered but for the way has been punished and no class of investors and operators have tried to intervene. Another point for which I feel unable to find an answer to, is the discount of over 1.5 p.c. suffered by July Series Nifty Future. This apart, there is generally a negative ‘cost of carry’ in case of most stocks and this only suggests that the large investors are not interested in effecting deliveries and also may be the that the professional bears have had to go for the final assault with borrowed stocks for which they have suffered the costs of high order.

Other things remaining same, the above scenario usually transforms in to the reverse happening with equal and opposite weight, as the scenario presented above is at a decidedly low point of nifty. It is not that a similar scenario at a high point i.e. standing tall after a recent reckless bull run, will also see prices surge further.It will see the prices coming down, in fact.You may better understand it this way that the scenario representing such unnatural extremes suggest that there are certain forces keeping it that way and therefore eventually will have lost capacity due to exhaustion and fatigue.

The logic is simple that the initial positions taken by bears are not getting squared up due lack of supply in market and there is need to create panic to be able to at least grab stocks from weak holders.They also understand that time is running out for them due to approaching result season also that some positive developments may become noticeable and may invite bulls or rather investment by big pools of idle money.The political thaw in SP’s relationship with Congress leadership on local front as well as the markets around the world having stabilised the inevitable may happen even in the opening session on this 1st day of July,2008.

Please excuse me for being so positive,in fact basically a fundamentalist in the field of investing and find it difficult to change stance.Those who have been following my writings would have noticed that I started crying foul way back since Oct 07 when the Nifty had just raised its head above 5000.It kept its journey on till early Jan 08 and since then while companies have still not posted any bad results as a whole there is loss of value to the extent of more than 30 p.c. from the precarious peak. This will explain many of the surprises that one encounters in everyday interpretation of the facts.